Inflation rising but no Interest Rate hike to be feared

South Africa’s economists are in unity when being asked about the dangers of an interest rate hike considering the latest bad news from the inflation front. The annual headline inflation rose to 6.4% in August from 6.3% in July, but is not enough to justify an interest rates hike as yet. The SA Reserve Banks’ Monetary Policy Committee (MPC) will make an announcement at its bi-monthly meeting later today. The country’s benchmark interest rate (the repo rate) is at a record low of 5% since July 2012.

The repo rate is the rates at which the SARB lends money to commercial banks. The prime lending rate of 8.5% is the rate at which the banks lend money to consumers. Nomura emerging market economist Peter Attard Montalto said the items responsible for the rise in inflation included food (up 7.1% from 6.8%) and transport (up 8.7% from 8.2%) costs. CitiGroup said it did not expect any change in the current repo rate, given the SARB’s policy dilemma of upside inflation risk, which is mostly rand-driven, and downside growth risk. Montalto concurred, saying the rand below R10/$ is likely to be a cause of optimism, but it still highlights upside risks to inflation and downside risks to growth. He expects, however, the overall tone of the MPC to be on the hawkish end of neutral.

“The US Federal Reserve announcement this evening can obviously blow all that out of the water, but the probability for a particularly hawkish surprise in our house view is very low indeed,” Montalto said. CitiGroup said they will pay close attention to comments on the labour unrest currently plaguing the country. Nedbank economist Johannes Khosa expects the SARB to keep rates unchanged despite South Africa’s weak economic environment. He believes CPI has peaked at 6.4% and expects it to come down, reaching the SARB’s target range by the fourth quarter of this year.

Reuters meanwhile quoted Treasury director general Lungisa Fuzile yesterday as saying that economic growth had been held back by supply constraints and is expected to moderate in the third quarter of this year. He reportedly told parliament’s finance committee that the weaker rand currency posed risks to the inflation outlook, while administered prices remained a significant driver to the consumer price gauge. Local interest rates averaged 13.34% from 1998 until 2013. It reached an all time high of 23.99% in June 1998.

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